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Introduction to Linux - A Hands on Guide

This guide was created as an overview of the Linux Operating System, geared toward new users as an exploration tour and getting started guide, with exercises at the end of each chapter.
For more advanced trainees it can be a desktop reference, and a collection of the base knowledge needed to proceed with system and network administration. This book contains many real life examples derived from the author's experience as a Linux system and network administrator, trainer and consultant. They hope these examples will help you to get a better understanding of the Linux system and that you feel encouraged to try out things on your own.

It's very difficult to restrict someone to their home directory. You could use a crippled shell, but they could just run a command which spawns a new shell....

You can use quotas to limit a users disk space, though I've never used quotas so I don't know how to set it up.

One solution to your problem would be to use user-mode-linux and let him have his own virtual box. You wouldn't need to restrict him to anything since he's locked into the virtual box and his diskspace is limited to the (fixed) size of the filesystem image. You'd need to disable mounting the hostfs though.

You don't have to reinstall anything. UML is a virtual machine that runs as a regular process on your host box. Just compile the kernel and grab a filesystem image. In fact, you can run as many as you want (memory permitting) so you could have dozens of virtual machines all networked together via a virtual network and using the host as a gateway.